Bad times bode well for forensic accounting

Although it might appear the worst of times on Wall Street and in financial markets, this is beginning to look like the best of times for forensic accountants, called in to detect fraud and to help with litigation.

Andrew Reiss, a principal at Berdon, said his firm has seen its forensic accounting business grow as companies become more aware of the danger of fraud and seek to detect and prevent it.

Bill Lenhart, a certified fraud examiner and national director of business restructuring at BDO Consulting, said this is a fine time for forensic accountants, who are essentially financial detectives.

“I think it’s a wonderful time [to have this expertise],” he said. “It’s a great opportunity for forensic people.”

Others said financial disasters generate growing demand for people able to figure out what happened and who, if anyone, is at fault.

“In any time of crisis, it’s always good to be in the forensic accounting area,” said PricewaterhouseCoopers New York forensic practice leader Manny Alas. “Lots of people in crisis are going to want to determine where the assets went and how to maximize value.”

Alas said government already has begun seeking the services of more forensic accountants.

“It’s really perking up,” he said. “Washington DC’s going to need lots of help from experts and seasoned professionals. There’s a big uptick in requests for proposals from the government.”

Forensic accountants investigate what’s known as actual fraud, when someone knew or should have known they were defrauding someone by stealing money.

But they also are called in to detect and evaluate constructive fraud, when management or insiders do things that amount to a fraud on others such as investors, possibly by paying dividends to themselves when a company is insolvent.

“You’re allowed to pay yourself a dividend, but it could be constructive fraud,” Lenhart said. “You took money out of the company that went bankrupt.”

When cases go to court, forensic accountants often become an important part of the case for plaintiff and defense lawyers.

“You have to explain it so it’s understandable to a lay person,” Reiss said. “You’re a witness. You want to be credible. You’re talking about complex information.”

Melville-based Marcum & Kliegman has been growing its forensic accounting practice, merging RosenfarbWinters, a large forensics firm, into its operations. Increasingly complex financial transactions are leading to a greater reliance on forensic accountants to uncover possible fraud.

“Transactions have been extremely sophisticated for a long time,” James T. Ash, a partner at Marcum & Kliegman, said. “Sometimes that is to circumvent regulations and accounting rules.”

He said the opaque nature of transactions involved in the current mortgage and lending crisis could create a surge of forensic investigations.

“It’s going to lead to a lot more forensic accounting work,” said Ash. “The transactions are so sophisticated. There typically is a financial interest associated with structuring the transaction in a certain way.”

Forensic accountants are brought in to investigate possible fraud, but are also called when there’s litigation alleging fraud has occurred.

Lenhart expects numerous corporate meltdowns and sinking stocks to prompt a flurry of allegations and lawsuits.

“In all of these major litigations, there’s a financial aspect,” Lenhart said of cases such as Enron, Worldcom and other corporate meltdowns. “What caused the problem, who is at fault and then, how much are the damages?”

“I think you’re going to see a tremendous amount of litigation coming out of all of this,” Lenhart said. “Everybody’s gong to point fingers at people when the dust settles.”

Reiss said stock drops themselves could lead to greater scrutiny and could motivate people to commit fraud to protect their holdings. He said forensic accountants can be hired not only by companies or shareholders, but also to help chief executives or directors.

“In today’s climate when you have such a downturn in the market and a credit crisis, there might be greater pressure for companies and greater opportunity for fraud to occur,” Reiss said.

“It’s kind of like a volcano that spews and can hit a lot of people,” he said of fraud allegations.

In addition to helping detect fraud, forensic accountants are being brought in more often to prevent it.

“There’s a great benefit to having forensic people look at a company,” Reiss said. “In today’s climate, with heightened scrutiny, you will see the trend moving toward prevention.”

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Claude Solnik covers healthcare, finance, and technology/energy for Long Island Business News.